Europhile: ‘That’s different. Also, you have to see: almost half of our exports go to the EU.’

Eurosceptic: ‘So? I’m not arguing for a withdrawal from the European market. I’m only arguing for a withdrawal from the EU as a political entity.’

Europhile: ‘You can’t have one without the other.’

Eurosceptic: ‘Switzerland can.’

Europhile: ‘That’s a special case. Besides, if we withdrew, we would still have to observe their technical standards.’

Eurosceptic: ‘And when we export to the Philippines, we have to observe Philippine technical standards.’

Europhile: ‘But that’s different, because… because…’

The reason why this dialogue is not working is that the two opponents are holding very different assumptions, without making them explicit.

The Eurosceptic’s assumptions are perhaps best explained by reference to a paper which appeared a while ago in the American Economic Review. It models the ‘optimal’ size of a political entity as a function of two countervailing forces, assuming, initially, a world dominated by high trade barriers.

The first force is economic productivity, which increases with the size of the country. This is because under conditions of heavy trade impediments, the boundaries of a market largely coincide with political boundaries. Small states are not economically viable, as they imply small market size, which limits the scope for specialisation and division of labour.

The second force is the political cost of heterogeneity, which also increases with the size of a country. This is the cost that arises when a heterogeneous population has to agree on a common policy mix. The optimum, in this model, is the point where the marginal benefit of market size is equal to the marginal cost of political heterogeneity.

Now suppose trade barriers are reduced. This shifts the equilibrium: it is now possible for people to be part of the same economic area, without having to be part of the same political entity. They are able to trade with one another without having to agree on politics. This means that the economic benefits of large markets can now be reaped without incurring the political cost of heterogeneity. Consequently, the optimal size of a political entity falls: ‘[T]rade liberalization and average country size are inversely related. Thus, the globalization of markets goes hand in hand with political separatism.’

This is an exact reversal of the conventional rationale for EU-federalism, which holds that globalisation makes larger political entities necessary. Au contraire: it is the very globalisation that makes smaller political entities viable.

But the critical assumption here is that having a common polity is not, in itself, desirable. It is a price to be paid in order to gain market access; and while that price may be acceptable, it would always be preferable if the benefits could be had without it. The ideal situation, in this model, is a huge common market with lots of small polities.

This model would have looked very different if it had been constructed by committed Europhiles. In that case, the formation of a joint polity would not have been modelled as a cost at all. On the contrary: it would itself have been the main benefit. For many Europhiles, the supposed economic gains are at best an add-on, and more likely, they are a post-hoc rationalisation.

If so, it would explain the Europhiles’ frequent refusal to contemplate the possibility of economic integration without political integration.

Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship.
He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.

It should be pointed out that Britain’s exports to (and imports from) the EU were markedly increased by joining it – at the expense of countries outside the EU, most markedly New Zealand, but not limited to the Commonwealth – and membership means trading with the EU is more likely. This is because the EU functions as a protectionist trading bloc, encouraging trade within the EU but discouraging trade outside of it, especially for a pro-free trade country like the UK. It seems to me that membership of the EU is a cost-benefit analysis: benefits are freer trade with Europe at the cost of i) lots of bureaucracy and ii) higher trade barriers with the rest of the world. Clearly, as the European economies are suffering it lowers the benefits of the EU relative to rest of world trade, especially as bureaucracy keeps growing and seems likely to increase.
The great tragedy of course is that we have to assume a world of high trade barriers (in part erected by the EU itself).

And for many Eurosceptics, I suggest that the supposed economic costs of withdrawal from the European Union are similarly almost an afterthought. It is political ‘independence’ which they value even if it costs something (which they may dispute).

Much of this debate revolves around regulations, and who controls them. I am a Europhile, that is because I have lived through the transition from outside to inside the EU. I still remember as a young engineer having to design multiple different versions of the same device, one for each export nation – so there wold be a British model, a French model , a German model as so on. Now all I have to do is to design a British Model, and thanks to harmonization (i.e. regulations) I can sell my product with hinderence to 27 other countries.

That is why Switzerland has to abide by EU regulations, but as it is not a member of the EU has no say in these rules.

From a crude business point of view we would be bonkers to to leave the EU

But when you add the additional benefits of decades of peace, freedom to live and work in anywhere in the EU, cultural and societal benefits, and last but most important the EU science & technology programme – it is no brainer.

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